Home sales start 2012 with a sharp fall

28,111 new and resale home transactions closed escrow in California in January 2012, up 1% from one year ago when 27,706 sales closed escrow, and down 16% from December. A sharp drop in home sales is typical from December to January, and does not indicate a new declining trend.

A total of 413,479 homes were sold statewide in 2011, a drop of 2% from 421,634 in 2010. first tuesday anticipates a further drop, to 407,000 annual home sales in 2012 before yearly sales volume begins to fully bottom in 2013, with a likely increase in the last half of 2013. Price movement, however, will lag behind any increase in sales volume by 12 to 18 months. [For a more extensive history and analysis of monthly and annual home sales in California, see the first tuesday Market Chart, Home sales volume and price peaks.]

Real estate owned property (REO) resales made up roughly 34% of all sales in the fourth quarter of 2011 — down from 38% one year earlier. This still-high proportion of REOs is expected to remain a constant for several years to come, likely into 2016. The normal REO resale percentage in pre-recession years was approximately 7%.

In 2012, mortgage delinquencies are expected to be more efficiently foreclosed by servicers under contracts with big mortgage banks, which will help accelerate the process of clearing REO inventory. [For our most current data on REOs statewide, see the first tuesday Market Chart, REO resales.]

Absentee homebuyers (a group generally composed of speculators, buy-to-let investors and renovation contractors) accounted for a record 27% of Southern California (SoCal) January sales. A record was also set in the Bay Area, where 25% of sales were to absentee buyers, up two percentage points from last month.

“Jumbo loans” (loans over the old conforming limit of $417,000) accounted for 14% of January sales in SoCal, down from 16% one year earlier. Jumbos made up 25% of Bay Area sales, a slip from 27% one year earlier. 2010 and 2011 saw a sharp rise over 2009 in the use of jumbo loans, likely attributable to an increase in foreclosures among high-tier properties and the Federal Housing Administration’s (FHA’s) increase of their loan insurance ceiling to $724,000. Jumbo use is far below its market share height in the boom times of 2006 and 2007 as prices return to their historical means.

FHA-insured loansmade up 31% of SoCal mortgage recordings, roughly even with December and down from 33% one year earlier. FHA-insured loans made up 24% of Bay Area mortgages, up from 23% in December and down one percentage point from a year earlier.

first tuesday forecasts this abnormally high percentage of FHA-insured loans will continue to drop in the future. Gradually, buyer’s agents are becoming aware that other government-operated entities and private mortgage insurers now guarantee almost all types of highly-leveraged conventional loans, including loans with low down payments and down payments from sources other than savings (family loans, gifts).

Importantly, the combined rate of interest and private mortgage insurance (PMI) is currently lower than the combined rate on FHA-insured loans, making FHA loan less appealing, which will help stabilize the multiple listing service (MLS) market. [For a comparative cost analysis of FHA-insured and PMI-insured loans, see the first tuesday Market Chart, FHA, PMI, or neither?]

Adjustable rate mortgages (ARMs) made up 6% of all SoCal mortgages, level with December and down from 7% a year ago. ARM use in the Bay Area was at 11% of all mortgages, level with one year ago. This relatively low volume of ARMs is due to the lack of any upward pressure on prices, as buyers refrain from overreaching in amenity value.

Cashpurchases represented 31% of SoCal sales and 30% of Bay Area sales in January 2012. Although these numbers are down slightly from February 2011’s records of 32% in SoCal and 30.5% in the Bay Area, they remain abnormally high in both districts, indicating absentee buyers (speculators) are still at work.

The ongoing spike in cash purchases indicates that speculators are still optimistic about a fast recovery in real estate sales volume and pricing. However, both sales aspects have slipped since late 2010 with no sign of upward movement; not a good sign for speculators, who require high resale profits.

first tuesday take: Over the last 12 months, home prices have risen and fallen from quarter to quarter, leaving no signs of any sustained increase in sales volume or pricing. Instead, the recent downward trends in sales volume and pricing reflect a slow drop since mid-2010 that has only recently begun to stabilize. Both are likely to remain at present levels until employment and homebuyer confidence improve significantly.

For now, signs indicate a continued vacillation in both home sales volume and pricing on the bumpy plateau of a real estate recovery – one quarter or so up, the next period down – will be the norm for at least two more years, and will most probably continue through 2015. Home sales volume, especially, is unlikely to show any sustained improvement until California experiences 18 continuous months of major monthly increases in employment (25,000-30,000 new jobs per month on average); support that has yet to begin. [For more on current home pricing, see the first tuesday Market Chart, California tiered home pricing.]

The dynamite combination of low mortgage rates and low home prices is certain to spark a slight rise in sales volume in upcoming months, but no more than that. Price movement exceeding the rate of consumer inflation is still years away. In the absence of job increases and a confidence uptick, low interest rates and home prices remain the sole drivers of real estate sales volume (excepting, of course, client advice from well-informed agents). [For more on homebuyer confidence, see the first tuesday Market Chart, Trends in homebuyer expectations; for more on California employment, see the first tuesday Market Chart, Jobs move real estate.]

Be warned: any significant increase in sales volume or prices will lead to a corresponding rise in interest rates and put an end to that run within 12 to 18 months (as occurred in 1984, 1994 and 2004 following recessions which ended two to three years prior). Another bubble, in real estate or low-skill jobs, is entirely out of the question for a generation. [For more on the influence of rates on home sales, see the first tuesday Market Chart, Buyer Purchasing Power.]

Expect annual price increases to be modest, even after 2015. If the historical trends at the end of the Great Depression in the 1940s are any guide to this Lesser Depression (and thus far they have proven highly relevant), real estate prices are not likely to rise at or faster than the rate of inflation reported in the Consumer Price Index (CPI). [For the most current CPI in Los Angeles, San Francisco and San Diego, see the first tuesday Market Chart, Current market rates.]

Today’s interest rates, which are essentially zero, can do nothing but rise, and thus will be unable to artificially bolster pricing as they did for the 30 years following 1980. Remember, the game-changing 2008 recession ended in mid-2009, but an ongoing financial crisis remains, superimposed on the economic recovery. Going forward, real estate (asset) prices cannot (generally) rise faster than the rate of consumer inflation without a drop in interest rates or a jump in the state’s gross domestic product (GDP), as happened in the 1980s and 1990s – neither of which are anywhere on the horizon.

For the moment, the best brokerage game in town appears to be home purchases by employed families and buy-to-let investors. Non-residential tenants considering a move by relocating to another building will also find themselves well situated.

Featured Comment

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